PTC Inc (PTC) 2004 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to PTC's fourth quarter and fiscal 2004 results conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. If anyone should require assistance during the call, please press star followed by the zero on your touch-tone phone. As a reminder, ladies and gentlemen, this conference is being recorded. I would now like to introduce Meredith Mendola, PTC's Vice President of corporate communications. Please go ahead.

Thank you. Good morning, everyone, and thank you for joining us today. Participating on the call will be Dick Harrison, our President and Chief Executive Officer, and Neil Moses, our EVP and Chief Financial Officer. In addition, Jim Heppelmann, our EVP of software products and Chief Technology Officer, and Barry Cohen, EVP of strategic services and partners, are here to participate in the Q&A.

Before we get started, I would like to remind everyone that during the course of the conference call, we will make projections and other forward-looking statements regarding future financial performance, business trends, and other future events. We caution you that such statements are only predictions and that actual results may differ materially from the results projected in these statements. We refer you to the risks detailed in the Company's 2003 annual report in form 10(K), our third quarter 2004 10(Q), and in the Company's other reports filed with the SEC from time to time. A replay of this call will be available until 5:00 p.m. eastern, Monday, October 25 at 203-369-1649. Additionally, this conference is being webcast, and a replay will be available through our website at PTC.com until Monday, October 25 at 5:00 p.m. Also, on our investor website is a .pdf document with financial and operating metrics that we will discuss on this call. As always, after our prepared remarks, we will hold a Q&A session. In order to keep this moving, please limit yourself to one question and one follow-up. If you have an additional question, you will need to get back in the queue. Let's get started. Dick?

Okay, Meredith, thank you. Good morning, everyone, and thanks for joining us today. We're, you know, happy to be on the call with you. For those of you in New York, I want to say, go Red Sox. We're pretty excited here. This is the end of the curse. Big game tonight, and we're really confident we're going to win.

At the end of fiscal year '04, we feel very good about our accomplishments. We met or exceeded our targets in all major areas.

Operating margin -- our margin in 2003 was negative 7%, and in 2004 was 12%. We were able to accomplish this by removing more than $140 million in expenses.

Net income -- we returned to profitability after the first quarter of 2004 and have demonstrated significant earnings leverage since then. Year over year we improved our GAAP net income by more than $130 million.

Revenue -- While we focused on profitability in 2004, we were also pleased that we held our revenue relatively flat. More importantly, we saw quarterly year-over-year revenue growth in each of the last two quarters of 2004. As a result, we have begun to demonstrate the earnings leverage we have in our operating model.

We have had major customer successes in 2004. Our superior solutions and adoption methodology allow us to help manufacturing companies solve significant business challenges within product development. This alignment around customer challenges is a clear differentiator for us versus the competition, and it demonstrates the evolution of our own customer approach. Our approach ensures that customers realize value from our products and services offerings. It minimizes customer risk through the up-front validation of our products across best practices in product development. It addresses one of the biggest issues in the software industry -- under-utilized technology at the customer's site. It ensures that PTC delivers on the promise of our product and services offerings so that customers can depend upon us as a product development partner. Our approach has allowed us to drive growth with major customer accounts like Toyota and Boeing, our two largest customers in 2004, and it has improved our ability to bring value to mainstream manufacturing companies. Let me give you an example. PICO 2 is the world's largest independent full-service provider of telecommunications power systems. Historically, its competitive advantage came from its ability to provide highly customized products on a large number of product platforms. Recently, however, trends in the telecommunications industry have made it necessary for PICO 2 to change this one-op approach as the cost of customized product development skyrocketed.

PTC offered a solution to this challenge -- a services package that helps customers transform their product development processes and optimize the use of their PTC software. After a successful services engagement with PTC, PICO 2 has completely reconfigured its product development process. Now, instead of building hundreds of one-op products with virtually no part reuse, the company offers just four major product lines. PICO 2 is achieving up to 90% part reuse on its products, and assembly and test time has been reduced by more than 60%. With its new product development processes, PICO 2 is able to turn around customer design proposals in days rather than weeks. More and more we are helping customers achieve similar results due to our focus on being a true product development partner, not just a technology provider.

We also made great strides in improving our distribution model in 2004. By expanding the capability and reach of our reseller channel, we have successfully grown our revenue from small and medium sized businesses by 28% this year. We also added more than 80 resellers to our program in 2004. The distribution model improvements have made our direct reps more productive and more motivated by allowing them to focus on major accounts. Direct sales rep productivity improved by 13% in 2004.

And finally, our maintenance revenue growth in 2004 is a clear sign that our products are being well received by our customers. We have been very successful in bringing long-standing non-maintenance paying pro-engineer customers back into the fold because of the power of Pro/ENGINEER Wildfire. Additionally, our Windchill Link solutions have enabled us to grow our Windchill production accounts and active seats under maintenance at a significantly faster pace than in previous years. We believe our customers have begun to invest in PLM solutions in a meaningful way. It is clear to us that a broader group of manufacturers is looking at these solutions. Manufacturing complexity continues to grow as a result of global product development strategies. These trends, coupled with an improved IT stand outlook give us confidence that the PLM market will grow significantly in 2005.

We are well-positioned for growth in 2005 and are excited about several strategic investments we are making in our business. We are enhancing our solutions value proposition by adding vertically specific functionality to our Windchill products in the electronics, high-tech, and aerospace and defense markets. This functionality turns Windchill into a more configurable solution that helps manufacturers with issues such as regulatory compliance and government bidding processes.

We plan to put more feet on the street to drive revenue growth. Today we have 310 direct reps and we plan to add 30 more in 2005. We are adding sales capacity in growth areas in Asia-Pacific, and we are augmenting our capacity in major accounts worldwide. We plan to invest in channel marketing activities. We have studied our competitive success rate through our resellers and have found that when we are invited to participate in deals, we win a majority of them. Pro/ENGINEER Wildfire has rapidly become a competitive alternative to other low-(INAUDIBLE) offerings. Our solution is differentiated by its ability to scale to meet the needs of growing small businesses, or those that are a part of the larger supply chain. Therefore, in 2005, we plan to grow our channel investments to support the resellers with lead generation activities.

We are also continuing our investment in training the channel to sell Windchill solutions. We have planned a major product release this fiscal year for both Pro/ENGINEER and Windchill with continued focus on ease of use and a tight integration between products. The product releases should extend our leadership position in providing our customers with a product-development system. We are excited about our financial progress in 2004 and look forward to accelerating our growth in 2005.

I will turn the call over the Neil to discuss the financials, and then we will take some questions.

Thanks, Dick. We are excited to report our financial results for fiscal 2004. Our full-year results represent a $133 million improvement in net income. And in the most recent quarter, we improved our profitability net of tax refunds and restructuring charges by almost $50 million year over year, and grew our revenue by 4%. Our fourth quarter operating margin was 17%, which is approaching our long-term target of 20%. Our cash position was $295 million, which excludes the $40 million income tax refund received after the end of the quarter and is up from $205 million a year ago. Our financial and operating metrics are available on our website, so I will take just a few minutes to add some color to our performance and then follow up with our guidance before we open up the call for questions.

Total revenue for the fourth quarter was $170.1 million. It breaks down as follows -- Licensed revenue was $52 million, which is flat sequentially, and up 4% year over year. Consulting and training services revenue was $34.1 million, which is in line with our expectations given our cost reductions in this area and some seasonal weakness in Europe. Maintenance revenue was $84 million, showing 3% sequential growth and 11% year-over-year growth. As Dick mentioned earlier, the maintenance revenue growth reflects significantly improved relationships between PTC and our customers.

By geography, the revenue was as follows -- North American revenue was $61.4 million, an improvement both sequentially and year over year. We have seen a modest recovery in the manufacturing sector in this region, which has favorably impacted customer spending. European revenue was $61.1 million which is above third quarter levels, but down year over year. We believe that this is attributable to the fact that the European manufacturing sector has not recovered as quickly as have North America. Asian-Pacific revenue was $47.6 million, which is up significantly year over year, although down slightly sequentially, due to last quarter's exceptional performance in both Japan and the Pacific rim.

Foreign currency did benefit our revenue both sequentially and year over year. At constant currency, European revenue grew 3% sequentially, but declined 9% year over year, while Asia-Pacific revenue declined 5% sequentially but grew 6% year over year.

Our reseller channel executed well in the fourth quarter and throughout fiscal 2004. For the quarter, the channel delivered $15.2 million in licensed revenue, up both sequentially and year over year. For the year, the channel delivered $56.2 million in licensed revenue. Total fiscal 2004 channel contribution, including service and maintenance revenue, grew 28% to $136 million. This contribution represents 21% of total PTC revenue in fiscal 2004, compared to 16% in fiscal 2003. Going forward, we will disclose total channel revenue instead of license-only channel revenue, so that it is easier for you to compare our performance to our lower end and mid-range competitors.

Moving on to operating metrics by product line -- design solutions revenue was $122.3 million, which grew both sequentially and year over year for the first time in almost four years. Design solutions license revenue was $35.6 million. It was flat sequentially and up year over year, reflecting a 12% increase in new seats, partially offset by a 5% decline in ASP. ASPs were flat sequentially, but down year over year due to continued strength in our lower priced packages of Pro/ENGINEER for small and medium-sized businesses. Design solutions consulting services revenue was $16.5 million. It was up slightly sequentially, but down year over year due to strategic reductions in our direct services delivery capacity. And design solutions maintenance revenue grew again to $70.2 million, reflecting continued improvements in customer satisfaction and in Wildfire adoption.

For Windchill, the metrics are as follows -- total Windchill revenue was 74. -- excuse me -- 47.8 million, showing both sequential and year over year growth. This sequential growth is particularly encouraging, given that our Windchill business grew 12% sequentially last quarter as well. Windchill license revenue was $16.4 million, in line with the strong performance of last quarter and the year ago period. Windchill PDM Link performed particularly well this quarter, as we are beginning to see past pilot activity transform into larger deals. Windchill consulting services revenue was $17.6 million, down sequentially and year over year, and, again, for the same reason as design solutions consulting service revenue. And Windchill maintenance revenue continues to grow. It was $13.8 million in the fourth quarter. And I think our ability to move customers more quickly through the pilot environment to the production environment is helping to drive that trend.

Now let me move on to our spending. Our operating expenses were $141.1 million, excluding restructuring charges. This is down 22% year over year and is slightly lower than we expected. And our head count was 3,042 at the end of the fourth quarter. We recorded restructuring charges in the fourth quarter of 1.1 million, almost all of which was for facility charges associated with our recently completed cost reduction program.

Regarding taxes, I would like to give you some detail about the $13.9 million benefit we booked in the fourth quarter. We reached a favorable resolution with the IRS on a tax settlement relating to our 1998 to 2000 fiscal years. The total amount of this refund from the IRS was $40 million. And while we were in discussion with the IRS, we were able to reserve a portion of the total refund on our balance sheet as a deferred tax asset. Because the total refund was higher than the amount reserved on the balance sheet, the unreserved portion of $18.9 million was recorded as a benefit to our tax provision on our fourth quarter income statement. This is a one-time benefit and was partially offset by the typical taxes we provide quarterly to cover foreign entity tax liabilities and indirect taxes in some Asian entities. This quarter, we provided $5 million in taxes for such purposes.

Moving to the balance sheet -- I mentioned that our cash was $295 million. It was up from $258 million in the third quarter. This is higher than we anticipated, due primarily to our improved operating performance, but also to strong receivables collections. These collections also helped to further improve receivable's DSOs from 77 days last quarter to 69 in days in the most recent quarter. Our deferred revenue was $177 million, down from $202 million in the third quarter as a result of typical seasonality of deferred revenue from annual maintenance contracts. Deferred revenue is up year over year, however, reflecting an increase in maintenance bookings. And, as you'll remember, the first and second quarters are usually our strongest quarters for maintenance contract renewals.

We should see this balance grow next quarter. On to our guidance. For the first quarter of fiscal 2005, which ends on January 1, our guidance is as follows -- revenue of $160 to $167 million and operating expense of $145 million. We do expect earnings per share on a GAAP basis to be between 3 and 6 cents. Cash should improve to approximately $320 million, and this cash projection includes the $40 million income tax refund that I mentioned earlier. Our revenue guidance for the first quarter reflects typical seasonality in our business. Like many software companies, we do incent our sales organization to close transactions in the fourth quarter, and as a result, revenues typically decline sequentially in the first quarter. Our revenue guidance does imply year-over-year growth ranging from 2 to 7%.

Although we are not providing full-year guidance for fiscal 2005, we are comfortable with the current analysts' consensus estimates for revenue and operating income for the full year. Below the operating income line, remember that we are anticipating an income tax provision of about $6 million per quarter for the foreseeable future, including each quarter of fiscal 2005. In addition, although I don't think our stock price today would reflect this, as our stock price has increased recently, our share count has grown due to the dilutive effect of previously issued options. While potential dilution from stock price increases is not likely to have a significant effect on our EPS in a given quarter, over the course of a year, it could impact our results by a few cents per share.

We are looking forward to growth in 2005. We do believe this growth will be led by license revenue improvement, and our sales product line has been growing for a few quarters now. As Dick mentioned, the work we have done to improve our products and partner with our customers to solve business challenges has elevated our status with them and improved our competitive position. As always, we have more work to do. In 2005, we will make some incremental investments in our business, including direct sales capacity, funds for channel marketing programs, and investments in vertical solutions. As a result, we expect to increase our spending in fiscal 2005 to quarterly levels between $145 million and $150 million. As you know, we have set a three-year goal of annual operating margins in excess of 20%. We made outstanding progress towards this goal in 2004 through cost reductions, but going forward we must reach this goal through revenue growth. We believe that in 2005 we can make investments in this growth, while still expanding our operating margins and progressing towards this goal.

Thanks a lot for your time today. At this point I am going to turn the call back over to Meredith.

Great. So I think we're ready for the Q&A session now.

(OPERATOR INSTRUCTIONS) We will take our first question today from Tim Fox. Please state your company name.

Tim Fox from Deutsche Bank. Good morning. You mentioned, Neil, that the expense level that you recorded in the quarter was actually within -- below your expectations, however G&A jumped 16% or so sequentially. What was the driver there, and do you expect to continue to see that going forward?

No. Actually, there were a couple of items that we booked to G&A expense. Quite frankly, are organizational expense, one of which had to do with incentive compensation and the other had to do with an internal consulting study that we have ongoing. So the -- I would say that the G&A number, in and of itself, is a little bit misleading for the fourth quarter, and you shouldn't expect to see that going forward.

Okay. And a follow-up. You have been fairly vocal about doing acquisitions as part of your growth strategy. I was wondering if you have established a set of metrics around what type of acquisitions you would do and what effect it may have on the P&L. In other words, would you try to limit it to being dilutive for a few quarters? How are you thinking around acquisitions and what size going forward?

You know, in terms of acquisition activity, the first thing I would say from a size perspective -- you know, we have some companies that are interesting to us kind of across the spectrum. So it's not size limited. As far as accretion/dilution, I think we would be willing to accept a transaction that was not accretive in year one. So a break-even transaction in year one would be fine as far as we are concerned in terms of acquisition activity. We would expect it to be accretive in the second year.

Thank you.

Richard Davis, go ahead. Please state your company name.

Richard Davis, Needham & Company. I apologize. This question won't help the day traders in the stock today. But in any case, you guys are trying to make a push into selling to some of the outsourcing firms who have decided to help other firms outsource their engineering processes and things like that I know it's kind of hard to put a circle around it, but roughly, how big is that business now? And how big do you think this thing could be in two or three years, not two or three quarters? It seems to me that's an important kind of organic growth driver for the business.

Richard, this is Jim Heppelmann. Let me first comment on the size of outsourcing, for example, to India, of engineering activities. Today, the engineering outsourcing market size in India is, by most estimates, about $400 million today. So the collective outsourcing to India represents $400 million worth of business. Most people project that growing to a $10 billion number in say a seven- to ten-year time span. So most people show growth rates north of 30% -- 35 to 40% sometimes for that business opportunity. We think that this trend really fundamentally drives the need for PLM infrastructure. The idea of a digital value chain that sort of encourages collaboration across geographic and company boundaries while retaining some level of information and process control is critical. So we think this phenomenon that we call global product development has, as I say, sort of some wind in our sails that make PLM a pretty critical technologies to companies who are beginning to embark down such strategies. I would say that most of the customers in our customer base are currently and actively evaluating such strategies.

Jay Vleeschhouwer, go ahead. Please state your company name.

Merrill Lynch. Good morning. Dick, you made a couple of interesting points about PLM and PLM demand. A question for you around that in terms of the economics of and demand for PLM. First of all, your new Windchill license seats were down year over year versus 2003, which was down from 2002. So one question would be do you think that you're going to start seeing some growth through fiscal '05 in terms of new Windchill placements? You are seeing some improvements in maintenance revenue after a bit of a dry spell in that respect, but your average new deal size remains quite small for Windchill. So the question there is do you think that with both new customers or repeat customers your average transaction size can begin to improve at all with Windchill? And maybe for Jim, how would you differentiate your economics of PLM deployment versus that of your closest competitors? We are seeing some interesting announcements from smaller companies anyway to try to lower to cost of deployment and maintenance.

Okay, Jay. Let me take a shot at it, at that multipart question there. PLM, we are definitely seeing -- we have talked about this for a few years now -- increasing demand in companies around PLM and committees that deal with this across the enterprise and benchmarks and so forth. One of the things Jim was just talking about with respect to Richard Davis' question, is that increasingly that when we sort of engage with a customer, we're talking about the engagement and the opportunity and the ROI calculations as more of a hard dollar ROI. Instead of just saying to the customer, You need a PLM system, we are talking increasingly with them about what they're doing with respect to going offshore with engineering. Call centers went offshore. Software development is offshore. Engineering is going offshore. And as Jim described, you can reduce -- take a $100,000 a year person doing design and drafting in Chicago and have the same basic capability in India for $15,000 to $20,000 a year. Our customers are all evaluating this opportunity, and so we're engaging with them on a sales and services sort of ROI and discussion about providing an infrastructure that enables them to take advantage of this low-cost, offshore engineering. Well, it's sort of a different discussion because you're talking about being able to do sustaining engineering and increased capacity and new product development, some of which would stay onshore, but maybe the less critical job functions move offshore.

I think there is a little bit of even an acceleration, I would say, in terms of some of these opportunities and benchmarks and studies and customer engagements. We've seen it grow steadily, but I think it's growing even faster. The only way I can account for the deal size and so forth is that while there seems to be a acceleration and so forth, and I think there is a general acknowledgement that this is a pretty hot market vis a vis some of the other markets like supply chain and CRM these days. It's still a new market and customers are trying to sort out and figure out what they want to do and how they want to do it. It's generally characterized by lots of smaller pilots that one success will expand. I'm actually pretty encouraged into the last six months in terms of what happened with Windchill and PDM Link and Project Link and sort of what the forecast bodes for this quarter and the balance of the year. We did see maintenance go up largely because while we sold new seats, we had a number of situations where customers sort of received value, particularly from some of the new releases of Windchill, and just accelerated the deployment, and therefore, the maintenance went up. All of that was pretty good news. I don't know, Jim, if you --

Yeah. Maybe, the second question, I think, had to do with competitors, particularly some of the lower-end competitors. We have executed a number of programs already to help us move down market. One major thing we did was we re-worked the Windchill installation and set-up process to make it much, much simpler. The second thing we did is we standardized the whole implementation process and set of activities with this so-called seven steps, adoption road map, and so forth. A third thing we did is we very much tightened up the interface between Pro/ENGINEER and Windchill so that for some of these small and medium-sized customers, we could position Windchill as an extension of the infrastructure they already have with Pro/ENGINEER. And then the fourth thing, which we're not quite ready to formally announce but actively working on is a hosted version of the solution, so that some set of customers could basically take delivery of a URL back to a hosted ready-to-go system as opposed to actually taking delivery of the software CDs and going through the implementation process and so forth. So I think, actually, we're doing pretty well moving down market and we are starting to see more and more smaller customers -- more of the Pings and customers of that size, as opposed to the big Airbuses and Lockheeds. And I think you will continue to see that. We are going to continue to move down market and be successful in these smaller environments. And in these smaller environments, total cost of ownership, integration with CAD, et cetera, are very critical. And these are places where I think we will perform very well against our competition

All right. Just a follow-up for Neil on the Pro/E side. Your reseller business was up sequentially, but your new seats were flat, slightly down, which suggests that perhaps there was an issue in terms of sell-through on the direct side. If you could address that issue. Back to Jim for a second, what you assuming in terms of your 2005 outlook with respect to the process of, let's say, phasing out support for Interlink and trying to get more customers over to Windchill?

Jay, can I just -- this is Meredith. I would just like to reiterate the point that I am always on with you. Sometimes our metrics are moving around a little bit, but I think you're losing sight of the fact that our revenue is up for both Pro/ENGINEER and Windchill year over year, and the license revenue is up. And that's really the metric that matters. Right? Seats are down this year for Windchill year over year. We cut a lot of costs out of our business, and revenue is up. That is the most important metric.

And Jay, one of the things that we have talked about before, and I was going to mention it earlier is we took 800 people out of the company, 200 in the sales organization, including like 80 reps from a year ago. Having done that and sort of reprioritized where they should be, we dropped down to, at one point, right around 300 or maybe even slightly below it at a certain point. We are starting to rebuild that back up with a focus on these large accounts, having taken the reps out of what we call the medium-sized businesses. They are really -- today, the sales model is one where we have large accounts and resellers. Anything that is not a named account, the channel has. So the channel continues to move up line. It's going to have another really good year. I was just out there at the channel meeting in Las Vegas the last two days. Huge momentum with that group in terms of enthusiasm and opportunity. We will see good results from the continued focus by direct sales force on these large accounts.

On the Pro/Interlink question, Jay, this is Jim. We have been, for some time, working on a strategy, somewhat openly, to ultimately merge Pro/Interlink into the Windchill platform and really make Pro/Interlink, if you will, a module of our Windchill solutions. This is important because this are somewhere around 10,000 customers who have licensed Pro/Interlink. And as we take those customers through this merger process, they become Windchill customers, and then the process of upselling them to a long list of new Windchill capabilities above and beyond Pro/Interlink becomes pretty simple. It is really just a case of turning on more license codes and so forth to enable the functionality that is already in the system they have deployed. So Pro/ENGINEER nicely leads to Windchill. We will, in the coming months here, unveil a program where Pro/Interlink nicely leads to Windchill. Collectively, that gives us a much, much larger addressable market space to go after with the Windchill technology within the existing Pro/E and Pro/Interlink customer base.

Thank you.

Yeah. That release that Jim is talking about is scheduled for, you know, in the April time frame, which isn't far away. The code is frozen. It has started to ship to beta customers. It will give us a competitive advantage vis a vis our competitors in that it will be unique. A customer using Pro/ENGINEER will have the opportunity to use the same PM tool in the engineering department, Windchill PDM Link, that is then leveraged throughout the enterprise, Windchill PDM Link. That's unique. All of the other competitors have multiple data management tools -- a unique one for the engineering department and different one for the enterprise, which have to be synchronized and updated, and both of which generally come from sort of different legacies, so to speak. So we are going to have a pretty unique competitive advantage in terms of having one common data model user interface look and feel throughout the entire enterprise, starting where the product is designed and then leveraged throughout the enterprise and on into the supply chain.

Yeah. And I might add, with collaboration capabilities to reach out and incorporate offshore and outsource partners who are playing an active direct role in the company's product development process. So it is a powerful combination of something for the engineering group, something for the enterprise, and something for the value chain, all on a common database and common architecture. And as Dick mentioned, there is no -- there is no counterpart to that amongst the set of competitors we have. They are all positioning one or -- well, let me say two or three different technologies to try to do that same set of important things.

So already in benchmark situations, we are forcing competitors to address the fact we are coming with one model in terms of the data management. One data management model from the engineering department through the enterprise. And they have got to explain why and demonstrate how they can have synchronize these multiple databases and come up with the same kind of a solution with different user interfaces, where they don't lose the data, where they have the same kind of response times, and it's pretty difficult for them to do that.

Thanks, Dick. Thanks, Jim.

Next question, please.

Philip Alling, go ahead. Please state your company name.

Yes, thanks. I'm with Bear Stearns. I just wanted to come back to the Windchill PLM performance in the quarter. You certainly had stronger growth in terms of Windchill PLM total revenue, license revenue in the June quarter. That has moderated down some in the September quarter. I was wondering if you could maybe just give a little color as to sort of that moderation down and the growth that you saw in that part of your business, and has that changed your outlook at all with respect to the growth prospects in this part of your business going forward, given the performance in this quarter?

Yeah. I mentioned this, I think, a little bit when I spoke earlier. What we have seen in the last couple of years around Windchill is a little bit of a sawtooth effect in terms of our revenue, which has been somewhat frustrating. Last quarter, we saw the best quarter that we had seen out of Windchill in the last two years. And this quarter, the most recent quarter, we improved on that. We grew our revenue an additional 5%. So I feel very good about the trajectory of our revenue for Windchill. Unlike the sawtooth pattern that we saw over the past eight or ten quarters, we have actually seen sequential growth, and we've seen sequential growth on top of a very strong quarter. The fourth quarter revenue for Windchill is the highest it has been in two years.

Would you say that on a long-term growth basis, that you still are looking at the Windchill business as sort of a main growth driver for the Company in that your expectations are sort of north of 10%, say, and we talked before about maybe a 15% long-term growth rate in that part of the business?

We haven't changed our expectations there.

A question with respect to Pro/E Wildfire. Has the performance of your sales in that area, has that changed your view regarding the growth prospects in the MCAD space? Do you feel as if there is more growth potential there now? Or is it sort of stable, or how has your view changed with respect to MCAD space given sort of how you are doing with respect to Pro/E Wildfire?

Well, I think as far as Wildfire is concerned, there is a couple of ways to look at it. First of all, this year, it has definitely resulted in a stabilization for us, with a result in maintenance level growth. And I think that's great. That's an indication of how the customer base feels about the product and feels about PTC. Longer term, we think there is a growth opportunity with Pro/E Wildfire as well, not just in maintenance, but in license and service as well. But to be fair about it, and I think this is kind of a consistent position that we have had for the last quarter or two, that we think that that's, you know, a low to mid-single type of growth opportunity, as opposed to a double-digit growth opportunity as is Windchill.

Okay. Thanks very much.

Han Phan, go ahead. Please state your company name. And we have Han Phan online.

Hello? This is Han Phan from Thomas Weisel. In terms of your reseller channel, that is picking up. I was wondering if you had some long term targets or '05 targets for that? And then secondly, could you elaborate more on your product road map? When can we start seeing some releases next year?

Okay. I will take the first one and hand the second one over to Jim. This is Neil. As far as the reseller channel, as I mentioned, it grew from 16% of total revenue last year to 21% of total revenue in the most recent year. I think that we expect to see further growth in '05. What's a reasonable target for it? It's probably somewhere just south of 25% would be my best guess.

Okay.

In terms of where we will land for '05. And Jim?

Yeah. The two key releases we're planning are Windchill 8.0 and Wildfire 3. Windchill 8.0 is scheduled to launch in the April timeframe, and Wildfire 3 is scheduled for the summer time frame.

All right. Thank you.

Gibboney Huske, go ahead. Please state your company name.

Hi. It's Gibboney Huske with CSFB. Could you give us an update in terms of your Ohio acquisition and what you're seeing in terms of E-CAD, MCAD integration? Just sort of initial customer responses, that type of color?

Why don't I take the first part on how Ohio is doing, and I'll hand it over to Jim on the integration side. We don't disclose their revenues separately because they are a very small percentage of our overall revenue, but I can tell you anecdotally that they had a very strong fourth quarter. I believe the best quarter they ever had. And their performance was more than double the revenue performance that we had in the previous quarter. So that's pretty exciting to us. Add to the fact that we're putting an overlay sales force in place for fiscal 2005 that really wasn't even in place in the fourth quarter, led by a senior member of the direct sales force here, and that overlay sales force is in Asia-Pacific, Europe, and also in North America. We are feeling very good about how Ohio is performing out of the box, and we have got real high expectations for the next year. And maybe Jim, you can comment on the integration side.

Yeah. The integration from a product level is going well. As Neil said, we had a good quarter selling the stand-alone product. In this current quarter, we will introduce yet another stand-alone product and the first integrated product, which integrates Ohio into Windchill. It will ship this quarter. I think from both a technical and an operational standpoint, this integration is going well.

Okay. And just my follow-up question. Just again on your MCAD pricing. It has been relatively consistent the last three quarters. I'm just trying to get your sense in terms of is that the type we should expect in '05, fluctuations within that type of range? Are there any other factors we should think about from product-driven or competitively-driven, et cetera?

I think we said in the past and probably still believe it, that I think MCAD pricing is stabilizing. I think that it is not clear to us that it has stabilized yet, to be fair. But the kind of fluctuation we saw around MCAD pricing in the past year was relatively modest. And the kind of new seat growth particularly driven by low-end seats was very encouraging. So we kind of see that model continuing. Stable to perhaps slightly declining ASPs in the MCAD world, and new seat growth that outstrips the decline in ASPs, particularly on the low end.

So that implies flat to modest growth in license?

Modest growth, I'd say, in license, yes.

Okay.

Remember that the issue is not a pricing issue, the issue is a mix issue in terms of the number of low-end seats that are being filled versus the number of high-end seats that are being filled. The ASP that we report is a blended ASP. We have three packages of Pro/ENGINEER. One is at 5 K, one is at 13 K, and one is at 20 K. And so depending on the mix of seats that we sell of each of those packages during the quarter, that is one of the big drivers of that ASP number.

Okay. You have given the rough mix between sort of the low-end seats versus, like you said, you have got three categories. Maybe just give us roughly the low end and --

We're looking that up for you, Gibboney.

Sure.

It's the same as it has been in the past few quarters, between two-thirds and three-quarters low-end seats.

Okay. Thanks.

Tim Fox, go ahead. Please state your company name.

Thanks. Just a follow up from Tim Fox at Deutsche Bank. Your maintenance revenue in MCAD is at the highest level this past quarter in, it looks like about six or seven quarters. Is there any way to think about when that maintenance revenue starts to flatten out a bit? In other words, you have had a fair number of customers come back to the fold. Is that percentage of customers that is out there that can still be tapped to come back in, is that decreasing significantly?

I think we feel pretty comfortable about the trajectory of our maintenance revenue overall, both Windchill and MCAD. In other words, I think that the maintenance revenue is going to grow on both counts through fiscal 2005. I guess you're right. Longer term, the trajectory of that maintenance revenue depends, you know, to a large extent on attracting new customers as opposed to perhaps winning some older customers back. We think this story that took place last year has some legs to it throughout 2005 and perhaps on into the first half 2006 as well.

Great. Thank you.

That it?

No. I think we have time for one more question.

Our last question will come from Jay Vleeschhouwer. Again, state your company name.

Merrill Lynch. Jim, I want to verify the product release schedule. You said Windchill 8.0 in April and Wildfire 3.0 in the summer. Is that consistent with what you said at the user conference in June for the Windchill X 5 release and the Wildfire K 03 releases? Is that the same schedule or did either one get pushed out at all?

That is the same schedule. The one small nit is that we anticipate having the Windchill X 5 product ready in March, but doing the launch in April, simply because we don't like launching products in the final month of the quarter. We're going to do the launch in April. But we're on target to have the product done in March.

Okay. And then Wildfire 3.0 release is on track as well?

Yes.

As are the X 10 release? Or that is more 2006. That's still on schedule?

Exactly. So all of our releases in 2005 are currently on schedule.

Okay. And then lastly for Neil, an additional question on the reseller channel. Our concentrated is that business? You have signed up a lot of resellers, but I will assume that business is fairly concentrated in a relatively small number? (Machine) seems to be consuming a lot of product over for Europe, but besides them, how widely distributed or dispersed is the revenue contribution from the channel?

It's actually pretty widely dispersed, Jay. That reseller channel revenue is coming world-wide. We can try to get the numbers for you by geography, but it's pretty equally split world-wide. While Mum (ph) is a significant presence for us in Europe. We have got significant reseller revenue coming from non-mum sources in Europe as well. Just to give you an example, let's see here -- world-wide revenue by geography -- trying to see what I'm looking at here --

Mum, you mentioned Machine, for example, you know, Jay, even, that's, as you know, a master distributor. So the distribution under them comes from a number of resellers. We don't really have, you know, a small number of big resellers. Generally in the U.S. and other geographies, I'd say it's characterized by -- if we get a reseller up to $500,000 per quarter, that's probably actually pretty good. To some degree, that's what we want. We'd rather not have, as we may have in the past, all of our eggs in one basket. And we prefer to develop, recruit, and then spend a lot of time, which is what we're doing today, developing the resellers and training them. We're going to provide them the links. We give them, you know, lead generation, a little bit of advertising, do a lot of seminars so that we can help invest in those regional resellers. Then they just consistently produce that revenue. Generally there aren't a lot of big ones.

Jay, now that I have got myself oriented, let me just come back to your question on the numbers. So, this is just license and service revenue. Roughly $70 million last year for the resellers and excludes maintenance revenue. There was $11 million in the Americas. And that comes from a broadly dispersed number of resellers. In Europe, our revenue was about $22 million. Mum accounted for about $8 million of that. So there is significant reseller revenue from non-mum sources in Europe. In Asia-Pacific, the number is $21 million. And in Japan, the number is $16 million. What I don't have in front of me is the total number of resellers we're dealing with. 270, Meredith says. So it's a broadly dispersed bunch both in terms of number and across geographies.

Great. Thank you. That helps.

I think you'll see that U.S. number go up because in some degree I think we had some execution issues in the U.S. in the last couple of years where we were trying to rely on some bigger regional kind of resellers and that, for us today, we feel like we're better off with a larger number of medium-sized resellers. That's the strategy. I think you'll see the U.S. number grow. It grew pretty nicely in the September quarter and will grow again in the December quarter.

Thank you.

Well, thank you for participating today. And again, we're rooting for the Red Sox and we will look forward to talking with you all again in January. Thanks.

That concludes today's conference. You may now disconnect.